U.S. banks’ earnings rose 17 percent in the October-December quarter from a year earlier, as losses on loans fell to a seven-year low and banks set aside less to cover losses as well as legal costs.

The data provides fresh evidence of the banking industry’s sustained recovery more than five years after the financial crisis struck. Still, the government says banks continue to have difficulty increasing revenues, and are relying on setting aside less for loan losses to boost earnings.

The Federal Deposit Insurance Corp. reported Wednesday that the banking industry earned $40.3 billion in the final quarter of 2013, up from $34.4 billion in the same period in 2012.

For all of 2013, bank earnings increased 9.6 percent to what the agency calls a record annual level of $154.7 billion. It exceeded the previous record earnings of $145.2 billion in 2006.

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The number of banks on the FDIC’s “problem” list fell to 467 in the final quarter of 2013 from 515 in the third quarter.

Banks’ losses on loans dropped 36.7 percent to $11.7 billion, the lowest level for a fourth quarter since 2006, the FDIC said. The largest decline came in home mortgages, which posted a 57.7 percent drop in losses.

FDIC Chairman Martin Gruenberg said the latest results showed “a continuation of the recovery in the banking industry.” At the same time, he said, the industry still faces challenges including only modest growth in lending, narrow profit margins and a decline in mortgage refinancing business as long-term interest rates have risen.

Bank’s lending increased modestly in the fourth quarter, as it has in recent periods. Total loan balances increased by $90.9 billion, or 1.2 percent, from the third quarter of 2013, with credit card loans marking a seasonal increase of 2.1 percent.

Community banks continued to post significant lending to small businesses, accounting for 46 percent of the industry’s loans to small farms and businesses, the FDIC said.

James Chessen, chief economist at the American Bankers Association, said lending growth is expected to be strong this year, with loans to individuals increasing about 7 percent and business loans rising around 8 percent. “Banks are a reflection of the economy,” Chessen said in a statement. “Demand for credit will grow as new jobs are created, incomes rise and business confidence returns.”

Banks with assets exceeding $10 billion drove the bulk of the earnings growth in the October-December period. While they make up just 1.5 percent of U.S. banks, they accounted for about 82 percent of industry earnings.

Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most of them have recovered with help from federal bailout money during the financial crisis and record-low borrowing rates.

Last year, the number of bank failures slowed to 24, still more than normal. In a strong economy, an average of four or five banks close annually. But failures were down sharply from 51 in 2012, 92 in 2011 and 157 in 2010 — the most in one year since the height of the savings and loan crisis in 1992.

In the fourth quarter, the decline in bank failures allowed the deposit insurance fund to continue to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $47.2 billion balance as of Dec. 31, according to the FDIC. That compares with $40.7 billion at the end of September.

The FDIC, created during the Great Depression to ensure bank deposits, monitors and examines the financial condition of U.S. banks.

The agency guarantees bank deposits up to $250,000 per account. Apart from its deposit insurance fund, the FDIC also has tens of billions of dollars in reserves.